Pricing technology in consumption-based model to business

The gap between the technology provider and business consumer seems to be widening in the world of technology, when it comes to cost of technology. For example,

1. Every enterprise client is concerned on the cloud consumption bill going higher.
2. With enterprise software licensed on a per user basis, the value realized as acknowledged by the business team, even within the same category of users is not uniform.
3. With GenAI, though co-pilot like services look very interesting and can deliver on productivity, the real value of productivity is not visible/ accepted by everyone up the chain like line managers, portfolio leaders and finance leaders.

Forrester in their predictions on enterprise software for 2025, (the link may/ will require Forrester access) has called out the pricing model change of enterprise software like adopting consumption-based pricing for enterprise software.

I think this would be successful if and only if,

• The technology team is able to establish the per unit cost of a business transaction through the IT system. Need to have full understanding of IT system involved for the business transaction and able to map the complete transaction flow.
• The business team along with the TBM team is able to create a model that shows the total cost of running a business transaction and the total revenue/ value created by that transaction.

It is essential to do this at per business transaction level and not in aggregated manner. Once it is aggregated, the cost transparency is lost and then IT would be treated as a cost center. For the IT/ technology to be operating as value creation partner for business, it needs deep understanding of the business process flows, be part of business decisioning and on the technology side, have clear visibility into implementation across the systems and be open with respect to cost.

Traditionally, IT has worked on fixed budget, both for engineering and operations, irrespective of the business transaction volume. Whereas the consumption-based pricing at both technology level by hyperscalers (a.k.a. serverless) and enterprise software vendors (SaaS), the IT can neither fully control the cost nor be responsible as well.

The "serverless" has created heartburns in the system, due to cost increase/ variation when there is

• increase in transaction volume
• increase in complexity of features,
• performance drop due to design

as against fixed cost in past in which due to variations like above, there was drop in transaction throughput or increase in response time.

Success criteria for the consumption-based pricing by enterprise software vendors, has been briefly touched earlier, expanding on that, the enterprise software vendors should,

1. Price based on true business transaction and not system transaction (though the vendor would incur cost of system transaction level). For example, in a PR submission and approval transaction, if a PR is sent back to the originator for clarification and approved later, it is still in single business transaction, though there would have been increased underlying resource consumption due to back-and-forth transaction movement.
2. Business transaction efficiency metrics has to be defined and tracked very aggressively, demonstrating how technology bringing about the change. Again, the key is per transaction level and not aggregate.

These enterprise software applications are not only to facilitate efficient business process execution but also create unique business differentiation in terms of products and services which typical stem from data processing, mining and using AI related technologies across customer data, operational data, market data, finance data and more. Here the measurement of value of the technology changes dramatically, as the new business capabilities created has a value, whose scale is not linked to the cost of the running the required transactions on the business software. So, the software vendor cannot price the consumption pricing like number of analysis queries executed / reported pulled. Then it would break the relationship with business and the business would prefer a fixed system cost which includes hardware and software.

Conclusion: Consumption based pricing for transactional system can be easily linked business operations cost and gain should in terms of efficiency. But for analytical system which drives growth, the consumption-based pricing model, would face some headwinds and needs more work.